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How to make money from video games: ‘Fortnite’ success draws investors to gaming firms

The runaway success of the Fortnite video game has renewed investors’ interest in the gaming sector. Fund managers believe the industry’s move towards downloadable games, ongoing subscriptions and “microtransactions” has increased its profitability.

Rather than making a one-off £50 purchase of a new game, say, customers now download a title online and are encouraged to make smaller purchases while they play to unlock new features. Gamers can also be charged a subscription by the console manufacturer or the game publisher.

Neil Goddin, a fund manager at Kames Capital, said eschewing physical media had reduced costs for publishers. Encouraging players to make transactions on an ongoing basis also meant games continued to make money long after their release.

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The runaway success of the Fortnite video game has renewed investors’ interest in the gaming sector. Fund managers believe the industry’s move towards downloadable games, ongoing subscriptions and “microtransactions” has increased its profitability.

Rather than making a one-off £50 purchase of a new game, say, customers now download a title online and are encouraged to make smaller purchases while they play to unlock new features. Gamers can also be charged a subscription by the console manufacturer or the game publisher.

Neil Goddin, a fund manager at Kames Capital, said eschewing physical media had reduced costs for publishers. Encouraging players to make transactions on an ongoing basis also meant games continued to make money long after their release.

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“Historically the sector was driven by hit games and companies struggled to make consistent returns,” he said.

“But the introduction of ongoing payments has reduced this volatility. Being able to download games and requiring membership to access online play or a full catalogue of content means revenues from each title are prolonged and more sustainable.”

Fortnite, an online battle game, has taken this model one step further. The game itself is free, but users pay to download customisable costumes for their in-game characters. SuperData, an industry analyst, has estimated that the game has generated $1bn (£770m) in revenue for its publisher, Epic Games.

Game on

Demographic trends are also encouraging. Gaming has shaken off its image problem and is no longer seen as the preserve of teenage boys. GameTrack, an industry analyst, said 46pc of British gamers were female in the first quarter of this year. More people are also gaming on the go using their mobile phone.

Michael Lindsell, a fund manager at Lindsell Train, said: “The number of video gamers has increased tenfold over the past decade thanks to the proliferation of smartphones. The average age of the gaming population has also increased, which is another positive trend. As a result, consumer spending on gaming is growing.”

Gaming has shaken off its bad image: almost half of British gamers are female
Credit: Paul Bradbury/Caiaimage

While Fortnite is owned by Epic Games, a private company, there are a number of listed gaming stocks for investors to consider. Activision Blizzard, EA, Take 2 and Ubisoft are the four biggest.

Mr Goddin said Ubisoft, publisher of the dancing game Just Dance, had been his biggest holding in 2018 and had performed well.

“Ubisoft has been able to increase margins through digital adoption and grow recurring revenues through in-game monetisation,” he said.

“Just Dance is a game my children like; you buy the game but to get the full catalogue of songs you must pay a yearly membership.”

Mr Goddin said Tencent, the Chinese tech giant that has a stake in Fortnite via its 40pc ownership of Epic, had bought 5pc of Ubisoft earlier this year to help sell its titles in China, something that Western games firms have struggled to do.

But the growth of the sector will not boost just the big games publishers, he said. Mr Goddin’s fund also holds a stake in Keyword Studios, which provides outsourcing services to game developers.

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Stephen Yiu, a fund manager at Blue Whale, sounded a note of caution about traditional gaming firms. He sold his stake in EA earlier this year amid fears that the sector might move towards the free-to-download business model used by Fortnite.

“If any pressure builds on the incumbent gaming companies to move to a new model, this would severely threaten their profitability,” he said.

However, he added that, even if this did occur, the big players would be well placed to benefit in the longer term as they own the gaming industry’s most popular franchises. Mr Lindsell said he had invested in publishers Square Enix and Nintendo because of the popularity of their existing franchises.

Some firms have already sought to address the risk. Activision Blizzard bought mobile gaming firm King Digital, owner of the free-to-play Candy Crush game, in February 2016 to help it tap into new markets.

The growth of “e-sports”, where players compete with each other in televised broadcasts, represents another potential revenue stream for the industry, Mr Goddin and Mr Yiu said. Rights to e-sports competitions are already being acquired by traditional broadcasters, with potential for significant future growth.

Gaming: the biggest players

Ubisoft

Investors saw a return of 801pc between August 2013 and August 2018, according to Blue Whale Capital, thanks to the games such as Assassin’s Creed Origins (pictured below)

Take 2

The enduring popularity of the Grand Theft Auto franchise (pictured) and the NBA and WWE sports games boosted the share price of Take 2 by 669pc over the past five years

EA

Digital microtransactions have helped EA, publisher of Need for Speed, The Sims and the long-standing Fifa football series (pictured), increase its share price by 394pc since 2013

Activision Blizzard

Its share price has risen by 304pc thanks to the success of games such as Overwatch (pictured). It bought King Digital to take advantage of the mobile gaming boom